Gold drops 7% in a week: why has its "safe-haven halo" faded?

Why Has Gold’s “Safe-Haven Halo” Lost Its Shine After a 7% Weekly Drop?

◎Reporter Huang Bingyu

Recently, gold and silver have experienced a global “sell-off.” On March 19, international gold and silver prices both plummeted: spot gold briefly fell to $4,500 per ounce, hitting a six-week low; spot silver plunged 12% intraday. By the close, gold had declined for seven consecutive trading days. Why has gold’s “safe-haven halo” faded?

Rate Logic Suppresses Safe-Haven Sentiment

As of 6 p.m. Beijing time on March 20, the international gold price hovered around $4,665 per ounce, with a weekly decline of 7%, marking the largest weekly drop since March 2020.

Despite being a safe-haven asset, gold has shown “unusually” weak performance since the recent Middle East geopolitical conflicts, with prices falling over 10%. This seemingly “counterintuitive” plunge is driven by a collision between “stagnant rally” and safe-haven sentiment.

“Gold’s ‘counterintuitive’ movement mainly stems from the significant suppression of safe-haven logic by interest rate dynamics,” said Qu Rui, Senior Deputy Director of Research and Development at Orient Securities.

A key backdrop is the “super central bank week,” during which multiple central banks announced interest rate decisions. The escalation of Middle East tensions pushed oil prices higher, and from the Federal Reserve to the Bank of England, policy tone appears to be shifting toward “hawkishness.” Global financial markets’ expectations for monetary policy have also quickly turned “hawkish.”

Federal Reserve Chair Jerome Powell stated after the March policy meeting that rising energy prices have directly pushed up inflation and may have chain effects on the economy by suppressing consumption, squeezing corporate profits, and disrupting supply chains. Until inflation shows clear signs of improvement, rate cuts are not on the table, even though rate hikes are not the mainstream expectation, but remain within policy discussions.

Additionally, the Bank of England also signaled a “hawkish” stance: “If larger or more persistent shocks occur, tighter policy measures will be necessary.”

Qu Rui explained that market expectations for rate cuts have cooled significantly, driving U.S. Treasury yields and the dollar index higher. Coupled with recent liquidity tightening caused by U.S. private credit withdrawals, the dollar’s dual role as a safe haven and yield asset has led to a diversion of safe-haven funds. Meanwhile, as a non-interest-bearing asset, gold’s opportunity cost rises with U.S. Treasury yields.

Zijin Tianfeng Futures Precious Metals Researcher Liu Shiyao told Shanghai Securities News that on one hand, the surge in oil prices reignites inflation expectations, sharply reducing the likelihood of Fed rate cuts this year, and the interest rate differential provides solid support for the dollar. On the other hand, rising oil prices mean the global need for dollars to settle energy transactions increases, passively expanding demand within the “petrodollar” system. Usually, the dollar index and gold are negatively correlated; when the dollar surges, gold is under pressure under traditional safe-haven logic, indicating that dollar appreciation’s suppressive effect on gold has surpassed the support from geopolitical premiums.

Markets are re-pricing higher and more prolonged interest rate paths, showing a reverse “Goldilocks” structure similar to 2022. “When market structures undergo drastic changes, cross-asset correlations reverse. Safe-haven assets experience a hierarchy reshuffle: the dollar replaces gold as the preferred safe-haven asset, and funds flow into the dollar system first during rising uncertainty, rather than into interest-free assets like gold and silver,” said a person from the Macro Research Center of Anbang Think Tank.

Gold and Silver Enter “Liquidity Crisis”

Liquidity shocks have made gold and silver “more difficult to obtain,” contributing to this unusual market behavior. Additionally, profit-taking in previous rallies has also pressured prices downward.

Recently, gold and stocks have shown a high correlation in movement—rising and falling together—causing traditional stock-bond and stock-gold hedging strategies to fail temporarily during tail risks. “This indiscriminate liquidation typically reflects extreme liquidity pressure in the market, indicating a deep risk-off environment,” said a person from the Macro Research Center of Anbang Think Tank.

When equity markets decline, overall liquidity tightens, and selling gold and silver becomes a means to obtain cash. “The market’s reaction on March 19 clearly reflected a decline in pricing and liquidity contraction. As assets that previously surged and had high volatility, gold and silver were among the first to be sold off,” said Liu Yuxuan, a researcher at Guotai Junan Futures.

Further, the person from the Macro Research Center of Anbang Think Tank explained that during the initial outbreak of Middle East geopolitical conflicts and soaring stock market volatility, gold was caught in a wave of deleveraging that sold everything. Investors often sell gold to meet margin calls, serving as a liquidity source. When the VIX fear index spikes, and investors face margin pressures, value-at-risk shocks, and portfolio rebalancing needs, they tend to sell highly liquid assets first to raise cash. Due to its high liquidity, gold often becomes the first choice for liquidation.

Short-Term Volatility Does Not Change Long-Term Investment Logic

Looking ahead, most experts agree that in the short term, liquidity squeezes and a strong dollar will continue to pressure gold. However, in the medium to long term, the underlying logic supporting gold—de-dollarization, central bank gold purchases, and a cycle of rate cuts—remains intact.

Yao Yuan, Senior Investment Strategist at Orient Securities Asset Management’s Asia Research Institute, stated that from a medium- to long-term perspective, gold has a proven track record of hedging geopolitical, macroeconomic, and policy risks: on one hand, the dollar is in a structural downtrend, and gold, as a hard asset independent of any sovereign credit, naturally functions as a hedge against dollar depreciation; on the other hand, geopolitical risks have become normalized, and with “de-dollarization” becoming a strategic choice for many central banks, gold’s role as the ultimate safe-haven asset is being reshaped.

Qu Rui believes that the future trend of gold prices will show “short-term pressure and long-term improvement.” In the short term, high oil prices will keep the Fed’s high interest rates in place longer, strengthening the dollar and continuing to suppress gold prices. But if conflicts persist longer, inflation and economic growth could be more significantly impacted, increasing demand for gold. In the medium to long term, as the effect of rising oil prices diminishes and inflation gradually recedes, the Fed’s rate cut cycle may be delayed but not absent. Coupled with ongoing global de-dollarization, steady central bank gold purchases, and weakening dollar credit, gold prices are expected to oscillate and rebound.

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